Propane users prepare for more potential shortfalls

WASHINGTON, Aug. 20, 2014 – Propane users are hoping Congress will still pass a bill this year designed to address some of the problems that led to last winter’s fuel shortage, which drove several Midwestern states to enact emergency measures. In the meantime, livestock producers and agricultural suppliers are ramping up storage to avoid more propane supply shortfalls in the upcoming season.

Last winter, the Federal Energy Regulatory Commission made history when it ordered priority pipeline distribution of propane after high prices, low inventories and infrastructure challenges combined with bitter winter weather to create a supply shortage. Additionally, the substantial fall grain crop pushed up the demand for grain drying, another key use of propane.

According to the National Turkey Federation, propane prices surged from $1.30 per gallon to more than $8 per gallon. In Minnesota, turkey farmers spent $25 million more last season than the previous winter to prevent poultry from freezing.

“We all know it’s difficult to get anything passed this close to an election, but this isn’t a very controversial bill,” said a National Chicken Council (NCC) spokesman, who believes the bill could pass by Dec. 1.

Meanwhile, propane suppliers are increasing storage with new rail terminals and chicken farmers are placing propane orders earlier to send a signal to the market to ramp up inventory, NCC noted. Other ways farmers are getting ready for winter in the wake of last winter's propane shortage include owning their own tanks instead of leasing; increasing on-farm storage capacity; scrutinizing their propane suppliers; and converting to natural gas in some areas.

National Turkey Federation board member John Zimmerman said he increased his propane storage capacity on his Minnesota farm by 15-20 percent.

“We were going into last year blind,” Zimmerman said regarding propane supplies. “This year, people been buying extra tanks and doing earlier contracting. They’re all hyper sensitive to price and supply issues.”

CHS Inc., a propane wholesaler and the country’s largest cooperative, invested $24 million in expanding rail terminals, said Matt Kumm, CHS propane marketing manager. Building up propane reserves is particularly important as more pipelines convert from shipping propane to natural gas.

CHS began planning for increased storage when Kinder Morgan announced it would reverse the flow of its Cochin pipeline that travels through the Midwest. The Cochin stopped transporting propane this year and will now be used to ship more profitable natural gas condensate to Canada to dilute crude oil. Kumm said CHS built new terminals in North Dakota, Minnesota and Wisconsin to help make up for the loss.

He also said it’s important for retailers and end-users like Zimmerman to plan ahead by investing in extra storage and buying fuel during the cheaper summer price season, which ends in September. He noted the potential need for crop drying this fall after a late planting season and the likelihood of a cold winter mirrors the same formula that led to propane shortages last winter.

“So if you’re not set on your storage, or your summer fill or contract [propane] gallons, there is still time to do it and I highly recommend that it’s done to avoid the potential to see prices spike again,” he said. So far, CHS has sold more propane tanks this year than it had in the previous 15 years combined, Kumm said.

In a report last week, the U.S. Energy Information Administration (EIA) noted that USDA is forecasting a record corn harvest for this year, and that this year's propane demand for crop drying will depend on fall weather patterns and harvest timing.

“Winter weather, which directly drives the level of propane use for heating purposes, remains the most important and most difficult-to-predict factor influencing the propane supply-demand balance this winter,” the EIA report said.

However, EIA reports that total weekly propane inventories now top 70 million barrels for the first time since December 2012. While inventory levels in the Midwest remain below the five-year average, above-average builds over the past six weeks are an encouraging trend, the agency noted. “Given the severity of last winter's supply challenges, market participants are paying close attention to the adequacy of propane supplies to meet agricultural and heating demands this coming season,” stated the EIA report.

In addition to increasing storage capacity, Zimmerman said he updated his barn heaters to use fuel more efficiently and invested in additional insulation. His biggest long-term concern is infrastructure and transport, he noted. “There will be a lot of demand this fall, even if we all put in extra tanks,” he said. “We’ve still got to be able to move the propane from where it’s made to where it’s used…and that means rail and trucks.”

This week’s guest on Open Mic is Ken Dallmier, President and COO of Clarkson Grain Company. While the global grain business is dominated by supply, demand and now trade wars, this Illinois-based company functions under a customer-focused mindset. Dallmier says this generation of consumer demand is dominated by a different set of social values leading to questions over the way food is produced and the prices they’re willing to pay. Sustainability, organic and non-GMO are providing farmers an income stream isolated from traditional market forces.

Department of Transportation Secretary Elaine Chao and Environmental Protection Agency Acting Administrator of the Andrew Wheeler recently announced their intent to reassess and correct the Corporate Average Fuel Economy standards.

The world of agriculture extends beyond what’s growing in your field or living in your barn, and here at Agri-Pulse, we understand that. We make it our duty to inform you of the most up-to-date agricultural and rural policy decisions being made in Washington D.C. and examine how they will affect you – the farmer, the lobbyist, the government employee, the educator, the consultant and the concerned citizen.